This round of US stock market correction is far from over? Strategist: It may fall another 10%

Founder and technical strategist of Renaissance Macro Research, Jeff DeGraaf, stated that three major bearish factors may push the US stock market down by about 10% in the coming weeks.

During an interview with CNBC on Wednesday, DeGraaf mentioned that the NASDAQ 100 Index (NDX) could fall to 17,000 points, a key technical level he is monitoring, representing a 10% decline from the current level.

For the S&P 500 Index (SPX), DeGraaf is closely watching the early August low of 5,120, to assess the possibility of it retesting the support level. This level has about a 7% downside potential from the current level.

Market Sentiment Overly Bullish

DeGraaf is concerned that market sentiment remains overly bullish, which is not typical when the market is at or near a bottom.

"When we look at the sentiment from small speculators in NASDAQ 100 Index futures, they are still very, very net long. In other words, they have been using weakness as a buying opportunity. And that's typically not the correct behavior to drive some sort of low in the market," DeGraaf said.

Tech Stocks Perform Poorly After Fed Rate Cuts

DeGraaf noted that tech stocks, which have been leading the market higher since the bull market began in October 2022, tend to perform poorly in the three months following the first Fed rate cut.

"When we specifically look at tech, it doesn't perform well after the first rate cut. Tech is very pro-cyclical, and cyclical stocks tend to underperform for at least three months after the first Fed rate cut," DeGraaf said.

Furthermore, despite the likelihood of a Fed rate cut in September being almost certain based on current US economic data, "US economic data may continue to be soft, and I think that's one of the challenges we face," he added.

"September Curse"

The historical poor performance of the stock market in September has been widely noted.

Regarding how this current downturn may unfold, DeGraaf mentioned that the stock market may weaken further towards the end of September and extend into early October.

He stated that such a decline could lead to the next two months being a period of sideways movement for the US stock market, which could be "quite frustrating."

Another potential form of decline could involve rapid position unwinding by trend followers and "extreme panic" among investors, similar to the situation during the yen carry trade collapse in early August.

Before these two potential scenarios unfold, DeGraaf believes that short-term stock market risks are skewed to the downside. "We haven't seen those yet, which is why we think there is more time for this adjustment to play out before it ends," DeGraaf said